FAR coverage for loss contingencies, gain contingencies, commitments, guarantees, warranties, and going-concern disclosure.
Contingencies and commitments are tested in FAR because uncertainty does not always create a liability. Some matters require accrual, some require disclosure only, and some require no recognition until a future event occurs. The exam answer depends on probability, estimability, whether the matter is a loss or gain contingency, and whether the entity has already received goods or services.
The safest approach is to separate recognition from disclosure. A probable and reasonably estimable loss contingency is accrued. A reasonably possible loss is disclosed. A remote loss is usually not disclosed unless a specific guarantee or similar rule applies. Gain contingencies are handled more conservatively because revenue or gains should not be recognized before realization is sufficiently certain.
| Lesson | Main question | What to master |
|---|---|---|
| Loss Contingencies, Gain Contingencies, and Disclosure Thresholds | Should the uncertainty be accrued, disclosed, or ignored? | Probable, reasonably possible, remote, reasonably estimable, gain contingency conservatism |
| Legal Claims, Warranties, Guarantees, and Potential Liabilities | How do common fact patterns change the accounting? | Litigation, warranties, guarantees, expected losses, journal-entry consequences |
| Commitments, Purchase Obligations, and Lease-Related Disclosures | When does an executory obligation become a recognized liability? | Purchase commitments, unconditional obligations, disclosure boundaries, onerous or loss contracts |
| Going Concern Evaluation and Disclosure Under ASC 205-40 | Does substantial doubt exist, and do management plans alleviate it? | One-year evaluation window, substantial doubt, mitigating plans, disclosure outcomes |
flowchart TB
A["Uncertain event or obligation identified"] --> B{"Loss contingency or gain contingency?"}
B -->|"Loss"| C{"Probable and reasonably estimable?"}
C -->|"Yes"| D["Accrue loss and disclose when needed"]
C -->|"No"| E{"Reasonably possible?"}
E -->|"Yes"| F["Disclose nature and possible loss or range"]
E -->|"No"| G["Usually no disclosure if remote"]
B -->|"Gain"| H["Do not recognize before realization is sufficiently certain"]
H --> I["Disclose carefully only when appropriate"]
| Scenario clue | Recognition response | Disclosure response |
|---|---|---|
| Loss is probable and reasonably estimable | Accrue the best estimate or minimum amount in a range when no amount is better. | Disclose nature and range when needed for clarity. |
| Loss is reasonably possible | Do not accrue. | Disclose the nature and possible loss or range when material. |
| Loss is remote | Usually do not accrue. | Usually no disclosure, unless special guarantee or similar guidance applies. |
| Gain contingency exists | Do not recognize before realization is sufficiently certain. | Avoid misleading disclosure that implies recognition is assured. |
| Commitment or executory contract exists | Do not record a liability merely because a contract is signed. | Disclose significant commitments when required or useful to users. |
| Going-concern substantial doubt exists | Apply ASC 205-40 disclosure logic rather than ordinary loss-contingency accrual logic. | Disclose substantial doubt and management plans when required. |